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Old 02-03-2017, 05:05 PM
 
Location: Jacksonville, FL
11,145 posts, read 14,123,720 times
Reputation: 7075

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Quote:
Originally Posted by Aredhel View Post
Right now you're in the 25% tax bracket. If SS pays out the way you expect it to (it may not, benefits may well be cut), and if RMDs don't force you into a higher tax bracket, you'll be in the 15% tax bracket when you retire. It's a drop, but not the huge drop you seem to be thinking of. And that's only if SS benefits aren't cut (forcing you to withdraw more taxable income yearly than you're currently planning from your 401k), and that the gains in your 401k don't force RMDs high enough to keep you in your current tax bracket. (RMDs go up as the 401k balance rises, and they also increase with your age.) Either or both could keep you right in your current 25% tax bracket during retirement. It's not a slam-dunk that you'll be in a lower tax bracket during your retirement, in part because you're not in a high tax bracket now.

What you don't seem to get is that the bigger gains in the traditional account are largely offset by the taxes you have to pay on the distributions 35 years from now. The traditional 401k balance damned well BETTER grow bigger over those decades - it needs to, in order to make up for the taxes you'll be paying on the withdrawals!

And the maximum balances you can contribute to a traditional 401k or IRA and a Roth 401k or IRA are the same. So the initial Roth 401k balance can potentially start from exactly the same place as the traditional 401k balance; needless to say, this clearly tilts the final results in favor of the Roth,as the ending balance will be the same in both accounts but you'll owe no taxes on the Roth funds at all.
I understand what you're saying, but I believe there is a major fallacy in your fact pattern.

I am not really in the 25% bracket right now (assuming you're talking federal taxes). Only 11% of my taxable income goes to federal taxes. For a biweekly paycheck, my taxable income is $1,937.48 and my federal tax withheld is $220.48. State tax withheld is $80.33. FICA taxes are $189.41 (SS + Medicare). So yes, it is true that the income over $37,950 is subject to 25% tax, but the vast majority of it is not. My annual taxable wages are $50,374. So effectively, my federal income taxes now are only 11% of taxable income. That's effective, not statutory. That's damn good.

Also, you mentioned that the taxes I would pay in retirement would wash out any extra gains I made during my lifetime before retirement using a traditional IRA. But if it's a wash, who cares? In fact, I benefit now from it because I have higher disposable income to live my life before retirement, which also matters to me.

So please stop.
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Old 02-03-2017, 06:07 PM
 
Location: Omaha, Nebraska
7,316 posts, read 4,160,046 times
Reputation: 18323
Quote:
Originally Posted by nep321 View Post
I am not really in the 25% bracket right now (assuming you're talking federal taxes). Only 11% of my taxable income goes to federal taxes. For a biweekly paycheck, my taxable income is $1,937.48 and my federal tax withheld is $220.48. State tax withheld is $80.33. FICA taxes are $189.41 (SS + Medicare). So yes, it is true that the income over $37,950 is subject to 25% tax, but the vast majority of it is not. My annual taxable wages are $50,374.
Which puts you very firmly in the 25% tax bracket. Nep, no one earning less than around $800,000 in taxable wages, salary, and tips EVER has the majority of their taxable income in their top marginal tax bracket. It's mathematically impossible for that to ever be the case, because of the way the brackets are structured. When people say "I am in the XY tax bracket," they are always referring to their top marginal bracket. They're not saying they're paying XY% of their income in Federal taxes (although some people who don't understand how tax brackets work may think that). There's absolutely nothing unusual about your situation from a tax standpoint.

No go pay off those lingering credit card bills, and then use the savings to invest more (or to have more fun - either is better than paying interest to credit card companies!).
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Old 02-03-2017, 06:38 PM
 
6,971 posts, read 3,867,910 times
Reputation: 14857
It is the rare 401k that allows unrestricted investment options and also operates completely free of commissions and fees. Exactly what is the load the OP is paying on this 401k of which he is so fond?

Certainly in looking at the long term productivity of his investments which has him convinced his money is better parked in that 401k than in a Roth IRA has he even considered how much additional appreciation he could be receiving in a conventional IRA as opposed to a no-match 401K?
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Old 02-03-2017, 07:35 PM
 
Location: Jacksonville, FL
11,145 posts, read 14,123,720 times
Reputation: 7075
Not to mention, the Roth IRA contribution limit is a pathetic $5,500 per year. How is that going to get me anywhere?!

At least I am able to contribute up to $18,000 per year in a traditional 401k. My employer doesn't offer Roth 401k's either.
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Old 02-03-2017, 09:57 PM
 
Location: Omaha, Nebraska
7,316 posts, read 4,160,046 times
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Quote:
Originally Posted by nep321 View Post
My employer doesn't offer Roth 401k's either.
Not many employers do, unfortunately. Roth 401ks are relative newcomers in terms of retirement accounts; they only came about in 2006 (while Roth IRAs have been around since 1997).

One change that badly needs to happen is to allow employees who don't have access to a 401k plan at work to invest up to $23,500/year in their IRA or Roth IRA (plus catch-up contributions if they are over 50), so they have the same investment opportunities as folks who have access to a 401k at work plus their own individual IRA. Why should people whose employer doesn't offer a retirement plan be so unfairly restricted in their retirement savings options?
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Old 02-03-2017, 10:33 PM
 
6,971 posts, read 3,867,910 times
Reputation: 14857
Quote:
Originally Posted by nep321 View Post
Not to mention, the Roth IRA contribution limit is a pathetic $5,500 per year. How is that going to get me anywhere?!

At least I am able to contribute up to $18,000 per year in a traditional 401k. My employer doesn't offer Roth 401k's either.
There is certainly no need to confine one's investments to plans offered through an employer and in most cases those plans may have higher expenses than individual plans.

That "pathetic" maximum has gone up from $2000 in just sixteen years so there is no reason to believe it will not continue to be adjusted. There is also no rule that would keep you from investing in both and if your effective tax rate is only about five percent as you stated earlier, it would only cost you $275 to park that $5500 in a Roth where it can appreciate unencumbered by future taxes, hardly enough to limit your buying ability now.
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Old 02-03-2017, 11:26 PM
 
Location: Omaha, Nebraska
7,316 posts, read 4,160,046 times
Reputation: 18323
Quote:
Originally Posted by kokonutty View Post
Certainly in looking at the long term productivity of his investments which has him convinced his money is better parked in that 401k than in a Roth IRA has he even considered how much additional appreciation he could be receiving in a conventional IRA as opposed to a no-match 401K?
Nep, this is a very good point; if your employer does not offer a match, there's no reason to favor investing your first $5,500 in your work 401k over a traditional IRA - and if your employer's 401k has a high administrative fee and only expensive fund choices, there's excellent reason not to. You should look at your 401k's costs very carefully; it may be a much better choice to max out a traditional IRA first, and only then start contributing to the 401k.
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Old 02-04-2017, 02:08 AM
 
71,568 posts, read 71,730,589 times
Reputation: 49168
it is best to develop multiple income sources in preparation for retirement . there are so many things linked to taxable income that having the ability to pull from different tax status accounts can save you a lot of money in other areas .

the best structure will be having roths , traditional and brokerage account in the plan
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Old 02-04-2017, 08:26 AM
 
Location: Jacksonville, FL
11,145 posts, read 14,123,720 times
Reputation: 7075
Quote:
Originally Posted by mathjak107 View Post
it is best to develop multiple income sources in preparation for retirement . there are so many things linked to taxable income that having the ability to pull from different tax status accounts can save you a lot of money in other areas .

the best structure will be having roths , traditional and brokerage account in the plan
Probably, but I also like to keep things very simple and easy to manage. I hate having multiple accounts for anything. Currently, I have one checking account, one savings account, one credit card account and one 401k account.
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Old 02-04-2017, 09:01 AM
 
71,568 posts, read 71,730,589 times
Reputation: 49168
take a word of advice . have more than one source .

we use fidelity for everything .fidelity's team of hackers found my wife's account info for sale on a under ground site .

the account was locked for the two weeks it took to redo everything . no money could go in or out . the more over lap and sources you have to turn to the safer it is for you . luckily we had a local account with enough to pay bills or sustain life , but there were a few times opportunity presented itself and i couldn't buy or sell anything .

if the bank opens an investigation on any money taken as opposed to just making good on the spot there is no time limit as to when you can write checks and pay bills
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